May 9, 2014 / 12:58 PM / 5 years ago

U.S. judge says Wal-Mart should face lawsuit over alleged Mexico bribery

(Reuters) - A U.S. judge said Wal-Mart Stores Inc does not deserve dismissal of a lawsuit claiming it defrauded shareholders by concealing suspected corruption at its Mexico operations, even after learning that a damaging media report detailing alleged bribery was being prepared.

A general view of a Wal-Mart store in Mexico City, April 24, 2012. REUTERS/Edgard Garrido

U.S. Magistrate Judge Erin Setser in Fayetteville, Arkansas, on Thursday recommended denying Wal-Mart’s request to dismiss the lawsuit led by a Michigan pension fund against the world’s largest retailer and former Chief Executive Officer Mike Duke.

A Wal-Mart spokesman said the company disagrees with Setser’s recommendation, which is subject to review by U.S. District Judge Susan Hickey. District judges are not bound by magistrate judges’ recommendations but often follow them.

Wal-Mart’s stock price, which is not known as particularly volatile, fell 8.2 percent in the three days after The New York Times reported on its investigation into the alleged bribery on April 22, 2012. That decline wiped out roughly $17 billion of market value. The Times’ coverage later won a Pulitzer Prize.

Plaintiffs, led by the City of Pontiac General Employees’ Retirement System, alleged that Duke and other Wal-Mart officials knew as early as 2005 that the Walmart de Mexico unit might have been bribing local officials to open stores faster, but did not probe the matter adequately in 2005 and 2006.

They said Wal-Mart should have “come clean” in a quarterly report filed on December 8, 2011, soon after it had learned of the Times’ investigation.

Instead, they said the report, known as a 10-Q, was a “phony demonstration of vigilance and virtue” that made it appear that Wal-Mart learned of suspected corruption in 2011, addressed it appropriately, and reported its findings to the U.S. Department of Justice and the Securities and Exchange Commission.

Setser said in light of later developments, reasonable investors would have viewed the 2005 and 2006 events as significant. These included an October 15, 2005, email to Duke, who then led Wal-Mart’s international operations, from Wal-Mart’s general counsel summarizing the alleged corruption.

“Plaintiff has sufficiently alleged that defendants knew the omission in the December 2011 Form 10-Q of the 2005 revelation of the suspected corruption and defendants’ 2005 and 2006 investigation was materially misleading,” Setser wrote.

Wal-Mart faces probes by U.S. and Mexican investigators into the alleged bribery, including whether the Bentonville, Arkansas-based company violated the U.S. Foreign Corrupt Practices Act. The U.S. Congress also investigated the matter.

“We’re very encouraged, and hopefully Judge Hickey agrees with the findings,” said Jason Forge, a Robbins Geller Rudman & Dowd partner representing the plaintiffs. “Once Wal-Mart knew the Times was hot on its trail, and that there was enough substance to the allegations that it needed to tell the DOJ and the SEC, it needed to tell investors.”

Wal-Mart spokesman Randy Hargrove said, “We respectfully disagree with the magistrate judge’s opinion, and continue to believe that the complaint does not meet the standard necessary to move the case forward.”

The lawsuit seeks class-action status for the December 8, 2011, to April 20, 2012, period. In Friday afternoon trading, Wal-Mart shares were up 39 cents at $79.08. Through Thursday, the share price had risen 26 percent since the article was published, while the Standard & Poor’s 500 was up 36 percent.

The case is City of Pontiac General Employees’ Retirement System v. Walmart Stores Inc et al, U.S. District Court, Western District of Arkansas, No. 12-05162

Reporting by Jonathan Stempel in New York; Editing by Nick Zieminski, Jan Paschal, Toni Reinhold

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